Buy recommendation from Merchant This is a very interesting analysis from Merchant Securities. I found that they were very conservative in their analysis but i posted the whole thing below and now everyone can see why they were so excited about buying a big chunk of this company. I cut and pasted it so it didn't come out perfect but all the information is there. By the way they a taget of 0.33 cents....thats what i mean about conservative. Just my opinion though.
Please do your own due diligence as well
Cheers
Edge Resources (EDE.TSX-V)
Onshore Canadian Oil
Edge Resources recently acquired an attractive heavy oil asset that provides immediate production, scope for material low-risk growth and additional exploration upside. A subsequent equity raise of $CAD 4.5M with a globally recognised institutional investor provides the company with the capital it needs to develop its newly acquired assets.
? Target Price: We are updating our target price for Edge Resources to $CAD 0.33/share, based on the discounted value of the company’s currently producing assets.
? McLaren Pool, Primate, Saskatchewan, Canada: On 1 February 2012, Edge announced it acquired a 100% working interest in 19 sections in the Primate area of West Saskatchewan, Canada for $CAD 8.8M. At the time of the acquisition, the acquired assets were producing 350 boe/d with a 65% oil weighting. Substantially all the oil production is coming from a single pool in the McLaren sands contained within two sections. The excellent quality of this heavy oil pool has meant that it has been developed without any pressure support (waterflooding), which is unusual for a shallow (750m) heavy oil field. We believe Edge will be able to grow production by i) providing pressure support and ii) by developing the southern portion of the pool which has been totally undeveloped.
? Upside, Primate, Saskatchewan, Canada: We note that Twin Butte Energy Corp (TBE.TSX-V, $CAD 480M), a growing junior oil company, is drilling very actively in lands that are immediately adjacent to several sections held by Edge. We also note that Twin Butte states that within its asset portfolio its Primate lands are providing some of the highest initial production rates. Twin Butte is developing a shallow channel sand system, the Waseca sands, which are very comparable to the McLaren sands. Therefore, we believe that Edge will look to explore in these sections for oil pools that could be comparable in scale to its existing McLaren pool. Given the amount of exploration activity occurring in the Primate area, we believe that more than half of Edge’s 17 undeveloped sections are prospective for
30 March 2012
Recommendation
BUY
Previously: (BUY) (14/11/2011)
Data
Price
Target price
Market cap
Enterprise value
Share price as at
Description
?CAD 20.0
?CAD 33.0
$CAD 21.2m
$CAD 35.3m
29 March 2012
shallow heavy oil.
Y/E Production Revenue
Cash EarningsFlow ($CADm)($CADm)
(1.0)(1.2)
(0.9)0.2
2.57.3
4.411.4
EBITDA ($CADm)
(1.0)
0.8
EPSCFPS (?CAD)(?CAD)
(3.0)(2.5)
(0.9)0.2
EV/ P/EP/CF EBITDA (x)(x(x)
n.a.n.a.n.a.
n.a.n.a.42.5
An oil & gas company with assets in Canada
Performance
Source: Bloomberg
Contact
Equity Analyst
Brendan Long brendan.long@merchantsecurities.co.uk
31 Mar
2011A
2012E
2013E
2014E
(boe/d)($CADm)
931.0
4816.2
1,08915.8
1,17821.4
8.32.36.98.12.74.1
+44 (0)20 7375 9033
12.4
4.210.8
4.51.82.8
Source: Company (actual), Merchant Securities (forecasts)
STX Institutional Sales Trading Desk
This is a marketing communication – please read the Disclosures and Disclaimers which form an integral part of this documentCorporate Broking
77333 +44 (0)20 7382 0941 +44 (0)20 7382 0942 +44 (0)20 7382 0940Edge Resources
30 March 2012
Valuation
? Grand Forks, Alberta, Canada: Fourth quarter light oil production at Grand Forks was circa 102 b/d. Operating costs were low at $CAD 19.37/b. Due to the limited per well production from the Grand Forks field, royalties too were low at 3.5%. Consistent with expectations, Grand Forks is delivering steady production.
? Equity Financing: On 5 March 2012, Edge announced that it had issued $CAD 4.5M of stock to Henderson Global Investments Limited and that $CAD 0.5M of debt was converted into equity. To fully complete this fundraising Edge will require the approval of existing shareholders. Upon completion, Henderson will hold 28% of Edge’s outstanding shares. Importantly, the use of funds from this fundraising will be entirely dedicated to developing the company’s oil assets. As part of the financing, Edge announced it plans to co-list on AIM in 2012.
? Debt Financing: On 28 February 2012, Edge Resources announced that it had obtained credit facilities totalling $CAD 18.5M from the National Bank of Canada. The highest interest rate applicable under these facilities is the bank’s prime rate plus 1.25%; however, most of the credit made available to Edge under the facilities will pay interest at the prime rate plus 0.75%. $CAD 7.5M of the $CAD 8.8M cost of the Primate acquisition was financed through a secured loan, the remainder was financed via the company’s operating line. The company’s current total financial debt is $CAD 19.3M and we estimate that the company will have a cash position of $CAD 4.4M (proforma at 31 December 2012) upon completion of the equity fund raising. A full set of past and projected financial statements is provided in the Financial Summary.
? Natural Gas: Edge has a drilling inventory of circa 700 gas wells through contractual agreements (earn-in agreements) it has entered into with other oil & gas companies. Edge has no financial obligations to drill these gas wells. Natural gas prices collapsed in 2011 and remain low. Benchmark prices in the USA are now circa $US 2.03/mmbtu. Currently there is very little economic gain from drilling natural gas wells. We believe that the best means of gaining equity exposure to a possible rebound in natural gas prices is through “free options” to drill wells, which Edge has. In our valuation we have assumed no capital is dedicated to natural gas.
? Key Assumptions in Valuation: We have assumed a Brent crude oil price of $US 105.00/b (inflated at 2.5% p.a.) which we estimate translates into a price for West Texas Intermediate of $US 96.03/b and a realised heavy oil price of $CAD 72.74/b. For Grand Forks we assumed that one well is drilled in late 2012 and that it produces 30 b/d. We assumed a decline rate of 9.5% for Grand Forks. For Primate we assumed that over the course of 2012 and 2013, $CAD 10.5M is spent developing the field consisting of $CAD 6.5 for new wells and workovers and $4.0M on a waterflood project. For the Primate/McLaren pool we assumed a decline rate of 35% before the waterflood stabilises pressure, thereafter we assume a 20% decline rate. Based on production gains from new wells, workovers and waterflooding, we estimate production from the McLaren pool should peak at circa 858b/d of oil in the first quarter of 2014. Based on our assumptions, the ultimate total recovery rate for the McLaren field would be 16%, which is low
Merchant Securities
Edge’s McLaren Pool:
Black dots: existing wells Triangles: identified drilling locations for new wells
Source: Edge Resources Ltd.
2
Edge Resources
30 March 2012
Valuation
suggesting there is upside to our valuation. Based on our assumptions Edge’s total oil production would peak at circa 970 b/d in the first quarter of 2014. At that time we expect Edge’s gas production to be circa 250 boe/d and of limited materiality from a valuation perspective (in the absence of a strong upward correction in natural gas prices).
? Conclusion: Edge has the ingredients of a successful high growth junior oil & gas company: i) good management ii) good assets and iii) capital. Edge has made an excellent heavy oil acquisition that will allow the company to grow production through low risk field developments (drilling new development wells, workovers and waterflooding). Additional upside is likely as Edge explores on the 17 sections it recently acquired in a highly prospective area. Future growth compliments current production which is generating immediate cash flow. We estimate production will be 814 boe/d in the first quarter of 2012. Cash flow per boe will increase as Edge’s oil weighting grows from 42% in Q1 2012 to 79% by Q1 2014. We believe Edge represents excellent value based on our DCF valuation and the company’s EV to expected EBITDA multiple of 2.8x (for the year ending 31 March 2014).
-Valuation and Financial Summary on following pages-
Merchant Securities
3
Edge Resources
30 March 2012
Details of our valuation are shown below:
Merchant Securities
Valuation
Valuation
Table 1: Valuation for Target Price
Source: Merchant Securities
Asset value
Grand forks - Light Oil Primate Primary - Heavy Oil Primate Waterflood - Heavy Oil Gas Production - Gas Total assets
Adjustments for NAV (31/12/11)
General & Admin (PV10) Hedging Cash (proforma) Financial debt (proforma) Adjustments for NAV
Net asset value
$CAD
Value
($CADm)
16.9 21.1 13.0
3.0
54.0
Barrels
(kboe)
Full $/bValue
($CAD/boe)
($CAD/share)
470 35.830.16 1,150 18.380.20 565 22.960.12 847 3.570.03
3,032 n.a.0.51
(4.9) - n.a. n.a.-
n.a.n.a.(0.05)
4.4 (18.5)
(19.0)
35.0
n.a.n.a.0.04 n.a.n.a.(0.17)
n.a.n.a.(0.18)
n.a.n.a.0.33
4
Edge Resources
30 March 2012
Year end (31 March) Balance sheet
Merchant Securities
Financial Summary
Financial Summary
2011A
Cash and equivalents Trade recevables Inventories -
2012E
4,822.8 761.7 - 71.0 33,728.2 39,383.7
2,197.0 18,524.9 - - - 4,259.0 24,980.9 14,402.8 39,383.7
6,238.7 (2,180.9) (3,045.8)
1,011.9 (1,220.1) (208.2) (205.9) (644.2) 129.4 (929.0) - (929.0)
(929.0) 1,220.1 - (129.4) 161.8 - 161.8
(18,400.0) - (18,400.0)
8,979.0 12,779.0 21,758.0
3,519.8
2013E
3,252.6 761.7 - 71.0 38,664.4 42,749.6
2,197.0 18,524.9 - - 892.0 4,259.0 25,872.9 16,876.8 42,749.6
15,835.3 (5,188.1) (2,312.9)
8,334.3 (3,963.8) 4,370.5 - (1,004.5) (892.0) 2,474.0 - 2,474.0
2,474.0 3,963.8 - 892.0 7,329.8 - 7,329.8
(8,900.0) - (8,900.0)
- - -
(1,570.2)
2014E
12,647.7 761.7 - 71.0 35,295.4 48,775.8
2,197.0 18,524.9 - - 2,488.9 4,259.0 27,469.8 21,306.0 48,775.8
21,448.9 (6,715.7) (2,333.6) 12,399.6 (5,369.0)
7,030.7 - (1,004.5) (1,596.9) 4,429.2 - 4,429.2
4,429.2 5,369.0 - 1,596.9 11,395.1 - 11,395.1
(2,000.0) - (2,000.0)
- - -
9,395.1
Key Data Description
An oil & gas company with assets in Alberta and Saskatchewan, Canada.
Website
www.edgeres.com
Management
PresidentBrad Nichol CFONathan Steinke
Key Shareholders (%)
Henderson Global Inv.28%
Market Data
Share price?CAD 20.0 Target price?CAD 33.0 Market cap.$CAD 21.2m Enterprise value$CAD 35.3m
166.5 960.7
Other current assets Long-term assets Total assets
76.8 17,298.9 18,502.8
Trade payables Current debt Other current liabilities Long-term debt Long-term deferred taxes Other long-term liabilities Total liabilities Equity 6,134.7
4,587.1 5,745.8 - - - 2,035.1 12,368.1
Liabilities and equity
Income statement
Revenue (net of royalties) Cash opex G&A costs EBITDA
Depreciation Operating profit Other Financial charges Income tax Earnings
Minority interests Earnings for shareholders
Statement of Cash Flows
Earnings Depreciation Other Deferred tax Cash flow from operations Changes in working capital Cash from operating activities
Capital expenditure Dispositions Cash from investment activities
Cash from equity raised Net cash from debt capital Cash from financing activities Net change in cash
Source: Company (actuals), Merchant Securities (forecasts)
18,502.8
956.9 (363.3) (1,561.1) (967.6) (257.2) (1,224.7) 410.9 (205.2) - (1,019.1) - (1,019.1)
(1,019.1) 257.2 (355.2) (43.9) (1,161.1) (252.7) (1,413.8)
(9,490.3) 836.3 (8,654.0)
4,248.8 5,732.3 9,981.1
(86.7)
5
Edge Resources
30 March 2012
Disclosures and Disclaimers Disclosure Checklist
CompanyRelevant disclosure
Edge Resources (EDE.TSX-V)3, 4
1.MSL acts as a broker to the company. 2.MSL acts as a nominated or financial adviser to the company. 3.MSL has in the last twelve months acted as adviser to the company or
provided investment banking services for which it has received compensation. 4.MSL has a shareholding (including any positions held as warrants
or options (if exercised) of between 5-10% of the share capital of the company. 5.MSL is party to an agreement whereby the production of research on the
company is one of the services MSL has agreed to provide to the company.
Recommendation definitions
Merchant Securities
BUY
HOLD
SELL
Share price appreciation of 10% or more in absolute terms over 12 months
Share price appreciation or depreciation of less than 10% in absolute terms over 12 months
Share price depreciation of 10% or more in absolute terms over 12 months
6
Edge Resources
30 March 2012
General Risks
This note makes a number of assumptions regarding the outlook for trading and market conditions affecting the company(s) discussed herein, relating to many factors including but not limited to demand for their products and services, specific drivers for future growth and assumptions regarding the economic climate in the UK and overseas. In the event of an adverse change in some or all of these factors, there is a risk that trading and market conditions deteriorate adversely affecting their prospects and share prices.
Past performance is not a guarantee of future performance. You should consider carefully, in the light of your financial resources, whether investing in shares or other investments is suitable for you. Your money is at risk depending on the performance of the relevant company and investments may go down in value as well as up. Any investment in a company is also subject to ‘counterparty risk’ as the shares or other investments are likely to be worthless in the event that the company goes bankrupt. You may, therefore, lose all your money in the event of company insolvency (counterparty risk) and the relevant shares or investments becoming worthless. You should also be aware that when trading in shares of certain smaller companies, including some listed companies and many of the smaller companies quoted on AIM or PLUS, it may not always be possible to sell or buy shares when you want and/or at a price you are willing to accept. If you need quick access to your money you should consider carefully before investing in smaller company shares as the absence of buyers or sellers in the market (a lack of liquidity) may make it impossible to sell your investment at a time you want to sell it.
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Important Disclosures
This research report is a marketing communication: it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is also not subject to any prohibition on dealing ahead of the dissemination of investment research, although as matter of policy Merchant Securities Limited (“MSL”) requires its employees not to deal ahead of the dissemination of this report.
The information contained herein is subject to updating, completion, revision, further verification and amendment and in any way, without liability or notice to any person. In addition, no duty of care or otherwise is owed to recipients of this report or any other person in relation thereto.Recipients of this report should conduct their own investigation, evaluation and analysis of the business, data and property described in this report. MSL provides specialist corporate finance and corporate broking services to small and medium sized companies, and investment research, investment management, institutional trading and private equity services to its retail and institutional clients.
MSL may undertake business and seek to do business with companies covered in its research reports. As a result, investors should be aware that MSL may have a conflict of interest that could affect the objectivity of this report. MSL and its officers and employees may have positions in the securities mentioned herein.MSL may have received compensation for corporate finance services from the company(s) mentioned in this report in the past 12 months. Analyst remuneration is not tied to corporate finance services performed by MSL.
This report has been published and distributed in accordance with our Research and Conflicts Management Policy which sets out the organisational and administrative arrangements for managing research conflicts of interest within MSL. Additional disclosures regarding previous and current research recommendations made by MSL and a copy of the Research and Conflicts Management Policy are available on our website: https://www.merchantsecurities.co.uk
Copyright 2011 Merchant Securities Limited
Merchant Securities
Disclaimers
When distributing this document, Merchant Securities Limited (“MSL”) is not acting for any recipient of this document and will not be responsible for providing advice to any recipient in relation to this document.
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This document may include certain statements, estimates and projections with respect to anticipated future performance. Such statements, estimates and projections are based on information considered reliable and may reflect various assumptions made concerning anticipated results, which may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their fitness for the purpose intended and should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on this material only. MSL or other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the person(s) who prepared them.
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This is a marketing communication – please read the Disclosures and Disclaimers which form an integral part of this document51-55 Gresham St, London EC2V 7EL